A good cap rate for small multifamily is not a universal number. It is the return implied by a property’s current net operating income relative to price—and it only becomes useful after the income and expenses have been normalized.
Start with the formula
Capitalization rate equals annual net operating income divided by purchase price. If a building produces $120,000 of credible NOI and costs $2 million, the going-in cap rate is 6.0%. That is a property-level yield before debt service, income taxes, and capital expenditures.
The arithmetic is simple. The judgment is in the NOI. Buyers should reconcile the rent roll to bank deposits, compare trailing-12-month expenses with the general ledger, normalize management and repairs, and estimate property taxes and insurance at the buyer’s expected basis.
What makes a cap rate “good”?
A cap rate is attractive only in context. Four factors matter:
Market durability: diverse employment, stable household formation, and demand anchors such as healthcare, education, government, or logistics.
Physical condition: roof, plumbing, electrical, parking, drainage, and unit interiors can turn an apparent yield into deferred capital spending.
Supply: units under construction, concessions, vacancy, and available land shape future rent growth.
Financing: the property must still cover debt service under realistic rates and amortization.
A lower cap rate may be justified by scarce supply, durable demand, or below-market rents. A higher cap rate can simply be compensation for weak collections, near-term repairs, volatile insurance, or tenant concentration.
Cap rate is not cash-on-cash return
Cap rate ignores leverage. Two buyers can acquire the same building at the same cap rate and earn very different equity returns because of their loan terms. That is why Draymoor also tests debt-service coverage, fixed-charge burden, replacement reserves, and downside occupancy.
Our related analysis, A 6% Cap Rate Is Not a Debt Strategy, shows why an apparently sensible acquisition yield can still fail a lender’s coverage test. Buyers should also compare the seller’s pro forma with actual multifamily NOI.
A practical screening rule
Use cap rate as a first-pass comparison, not an investment conclusion. Recalculate NOI, run a tax and insurance reset, include recurring reserves, and stress the exit cap rate. If the deal only works because every optimistic assumption arrives on time, the cap rate was never the margin of safety.
Draymoor Ventures looks for small and midsize real estate where current operations support the basis and growth remains upside. Share an opportunity: Steven@DraymoorVentures.com.